Northeast U.S. carbon market expected emissions to tighten cap

WASHINGTON (Reuters) - States involved in the developing northeastern U.S. carbon market are expected to announce on Thursday that they will reduce the program's emissions cap as a way to stimulate allowance trading and strengthen its environmental goals, according to the Natural Resources Defense Council.

The Regional Greenhouse Gas Initiative's (RGGI) nine member states have agreed to lower the market's carbon cap to 91 million short tons from the current level of 165 million for the next phase, which will run from 2014 to 2017, said Dale Bryk, an attorney for the Natural Resources Defense Council (NRDC), which is a RGGI stakeholder and observer.

The regional initiative is the first market-based regulatory program in the United States that has a goal of reducing greenhouse gas emissions.

States sell emission allowances, mostly through auctions, and the proceeds are used to fund energy efficiency and renewable energy projects.

RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.

An RGGI official confirmed that an announcement is pending but could not provide details.

Most power plants in the RGGI states currently have no incentive to trade in the nascent carbon market because the region's emissions fall well below the current cap, which had been set based on projections made in 2005.

The cap had been set higher back then because natural gas prices were around $8 and the economy was booming. But when the market began trading at the end of 2008, natural gas prices and the economy sank, which lowered carbon emissions.

The cap reset is one of a number of changes that the program is expected to announce on Thursday, Bryk said.

She said the states are also expected to announce that they will raise the minimum bid price for allowances to over $3 per ton from the current level of $1.93.

State officials have been reviewing the program for over a year. Consultancy ICF International modeled scenarios looking at what would happen if the original 2014 cap was reduced to 97 million tons or 91 million tons.

Emissions from the roughly 160 power plants covered by the program last year were projected to come in at about 91 million tons, the new level agreed by the RGGI states.

There has been growing pressure by state lawmakers and emissions traders to tighten the cap.

Andrew Cuomo, the governor of New York, the initiative's biggest emitting state, this week called for RGGI to tighten its cap during his annual "State of the State" address, in which he outlined his policy priorities.

The NRDC's Bryk said the announcement will send an important signal to other states that have not yet set mandatory carbon emission limits or set a price on carbon emissions.

California is the only other state to have in place a mandatory carbon cap-and-trade system. While RGGI covers the northeastern U.S. electric sector, California's market plans to cover over 80 percent of the state's economy.

Actions taken by these states are going to be important in the coming years as the U.S. Environmental Protection Agency begins to regulate greenhouse gas emissions from the country's existing fleet of power plants.

While the EPA is expected to set a national standard, it will likely be up to the states to come up with plans to comply with that target.

(Reporting By Valerie Volcovici; additional reporting by Rory Carroll in San Francisco)